Debtwire Broadcast: Walter Energy Enters Chapter 11 Debtwire’s team of reporters and analysts hosts a roundtable discussion exploring the legal arguments

Debtwire Broadcast: Walter Energy Enters Chapter 11

Debtwire’s team of reporters and analysts hosts a roundtablediscussion exploring the legal arguments and valuation variables likely to shape Walter Energy’s bankruptcy case | 17 July 2015

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Agenda

Opening Remarks: Andrew Descent into Chapter 11: Madalina

– Overview– Dual track plan – Sector Impact

The Road Ahead: Jack– Plan/Sale Dual Track Process– Venue– Union and Pension Issues– Coal Company Legacy Liabilities– Strategies for Investor Involvement

Achieving an Equity Slice Maximizing Out-of-the Money Recoveries

– Official Committee Concerns– Other Considerations

Collateral Packages Blue Creek Administrative Priority Claims Executory Contract Assumption NOLs Intercompany Transfers Customer Relationships

Financial Analysis: Tim– Prepetition Capital Structure Overview– Projection– Company Valuation

Appendix:– Proprietary News– Legal Analysis– Financial Research

Biographies

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Descent into Chapter 11

Ch. 11 filing is the culmination of:

– Slump in metallurgical coal prices

– Idling mines, slashing capex to extend liquidity runway

– Futile debt offerings

– Bondholder Leapfrogging

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Dual track plan

– Equitize first lien debt, or,

– Complete an auction

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Sector Impact

– Consolidation

– Alpha Natural Resources, Arch Coal, Murray Energy, Blackhawk Mining, Patriot Coal, James River Coal, Walter Energy

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The Road Ahead

Plan/Sale Dual Track Process– Plan: First lien creditors using fulcrum status to receive reorganized equity on

account of claims.– Sale: First lien credit bid would impose high hurdle for competing bids.

Toggle: The toggle between the two revolves around the ability to achieve union concessions whether the Bankruptcy Court will permit a sale that leaves

union liabilities behind. Administrative Claims and Chapter 7:

High administrative claims plus no cash proceeds might mean a chapter 7 conversion post-sale, but will the Bankruptcy Court allow it?

– Cash Collateral: Seven month timeline with guiding milestones. Second lien silence.

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The Road Ahead

Venue– Importance for coal and union liability issues.– Barriers to efforts to transfer.

Union and Pension Issues– Concessions required by first lien creditors.– USW looming CBA expiration.– The 1113/1114 fight.– USD 661m pension withdrawal liability threat.

Coal Company Legacy Liabilities– AROs, Black Lung and MSHA.– Surety involvement.

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The Road Ahead

Strategies for Investor Involvement– Achieving an Equity Slice:

Hurdles to becoming a successful plan sponsor or asset purchaser will tip the scale to maximizing litigation leverage in order to get a piece of the action.

Chiseling away at first lien position by attacking liens, lender liability claims and securing a second lien position.

– Maximizing Out-of-the Money Recoveries: Potentially small pot of unencumbered assets. Leverage in seeking avoidance of the reconsidered prepetition first lien interest payment.

Official Committee Concerns– Membership: Indenture trustees, PBGC and a few trade.– Cash Collateral Fights: Monthly fee cap, investigation budget/timeframe and liens on

avoidance action proceeds.

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The Road Ahead

Other Considerations– Collateral Packages: Investigating the holes in US and Canadian guarantees, pledges and

collateral overlap between debt issuances.

– Blue Creek: Rights underlying significant future development prospects are unencumbered.

– Administrative Priority Claims: Potentially significant IRS, WARN and other employee-related liability exposure may threaten plan feasibility.

– Executory Contract Assumption: Exploring anti-assignment concerns.

– NOLs: Valuable assets to be preserved (USD 550m federal income tax, USD 425m federal alternative minimum tax)

– Intercompany Transfers: Co-owned vendors and intercompany accounting to be considered, including approximately USD 2bn in “hybrid financing” between US and Canadian entities.

– Customer Relationships: Small, foreign customer base.

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Financial Analysis – Pre Petition Capital Structure

Pre-Petition Capital Structure Coupon Face Amount Price Market Amount Yield Maturity Est. Annual Interest

USD 76.9m First Lien Revolver (73m LC) 1 L + 5.5% 0 67.0 0 64.0% 01 Oct 2017 -

First Lien Term Loan B 1 L + 6.25% 978 51.0 499 34.6% 01 Apr 2018 71

First Lien Notes 1 9.5% 970 52.0 504 30.3% 15 Oct 2019 92

Capital Lease & Equip. Financing - 14 - 14 - - -

Second Lien PIK Notes 1 11%/12% 361 5.5 20 - 01 Apr 2020 40

Secured Obligations 2,323 1,037 203

Senior Unsecured Notes 9.875% 388 1.5 6 - 15 Dec 2020 38

Senior Unsecured Notes 8.5% 383 3.0 11 249.5% 15 Apr 2021 33

Consolidated Debt 3,094 1,055 274

Less: Cash as of 6/30/15 2 270 270

Net Debt 2,824 785

(1) The Canadian guarantors only guarantee the obligations incurred under the Canadian Revolver. According to the lender presentation (pg.23), the Canadian obligations comprise approximately 70% of revolver availability, of which USD 24m is committed to undrawn LC's. The term loan, 9.5% first lien notes ,and the second lien PIK notes all have a 65% residual stock pledge of the Canadian assets.

(2) USD 270m cash balance disclosed in CFO declaration, as of 30 June 2015.

Source: SEC Filings, MarketAxess, Markit, Debtwire Analytics, Court Documents

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Financial Analysis – Projections

TBD

Financial Forecast (USDm) 2015 2016 2017 Pro Forma Balance Sheet (USDm) FYE15 FYE16 FYE17 Projected Cash Flows (USDm) 2015 2016 2017Benchmark Met Price $104 $107 $109 Cash & Equivalents 69 (131) (325) Net Income (Loss) (539) 3,550 (227)Total Revenue 999 978 1,073 Restricted Cash 42 20 20 AdjustmentsCash Cost of Sales (1,014) (943) (1,069) Net Receivables 207 207 214 Depreciation & Depletion 224 139 144 Transportation Minimum Penalties (4) (8) (3) Inventories 158 160 177 Deferred Income Tax Expense (Benefit) 0 - -SG&A (67) (64) (64) Other Current Assets 74 74 74 Deferred Taxes Payable (26) - -Postretirement Benefits (54) (55) (55) Total Current Assets 549 328 160 Postretirement Benefits/Capital Lease Amort. (621) 28 27 Other Savings Initiatives 6 39 39 Long Term Assets 4,213 4,161 4,133 Receivables 12 0 (7)1113 EBITDA Impact - - - Total Assets 4,762 4,489 4,293 Inventories 44 (2) (18) EBITDA (134) (53) (79) Prepaid Expenses/Other Current Assets (1) - -Working Capital 37 31 2 Accounts Payable & Accrued Expenses 63 45 50 Accounts Payable 6 (2) 5 Capex (82) (87) (116) Accum. Postretirement Benefits - - - Accrued Expenses/Other Current Liabilties (133) (16) -Sales of Investment (2) - - Other Current Liabilties 219 219 219 Cash Flows Provided by Operating Activities (1,076) 3,720 (77) Unlevered Free Cash Flow (181) (109) (193) Total Current Liabilties 282 264 269 Cash Interest (109) - - Investing ActivitiesProfessional Fees (55) (55) - Revolver - - - Capex (82) (87) (116)Admin. & Other Claims - (26) - Term Loan B - - - Sale of Investments - - -Adequate Protection Payments (54) (11) - 9.5% Sr. Sec. Notes - - - Other (2) - -Emergence Proceeds - - - 11/12% PIK Notes - - - Cash Flows Used in Investing Activities (84) (87) (116)Restructuring Adjustments/Other - - - 9.875% Unsecured Notes - - - Free Cash Flow (399) (201) (193) 8.5% Unsecured Notes - - - Financing ActivitiesRevolver Draw - - - Other Debt, Net of Discount - - - Revolver - - - Cash Flow (399) (201) (193) Term Loan B (978) - -

Long Term Liabilities 912 940 967 9.5% Sr. Sec. Notes (970) - -Beginning Cash 469 70 (131) Liabilities Subject to Compromise 3,834 - - 11/12% PIK Notes (350) - - Ending Cash 70 (131) (324) Total Liabilities 5,028 1,205 1,236 9.875% Unsecured Notes (388) - -

8.5% Unsecured Notes (383) - -Beginnings Stockholder Equity 283 (266) 3,284 Other Debt, Net of Discount (12) - -Plus: Net Income (540) 3,550 (227) Liabilities Subject to Compromise 3,834 (3,834) -Other (9) - - Dividends - - - Total Stockholder Equity (266) 3,284 3,057 Share Issuance 8 - -

Cash Flows Provided by Financing Activities 761 (3,834) 0 Total Liabilties & Stockholder Equity 4,762 4,489 4,293

Cash Flows Provided by Continuing Operations (400) (200) (193) Memo: Proj. Canadian & UK Cash Balance 10 (18) (43)

Beginning Cash 469 69 (131)Change in Cash (400) (200) (193)Ending Cash 69 (131) (325)

Source: 8-K Filed 7/15/15, Ex. 99.2 "Project Diamond Lender Presentation" Pg.46-47

* See lender presentation for monthly projections.

Source: 8-K Filed 7/15/15, Ex. 99.2 "Project Diamond Lender Presentation" Pg.40

Source: 8-K Filed 7/15/15, Ex. 99.2 "Project Diamond Lender Presentation" Pg.41-42

* See lender presentation pg. 44-45 for monthly income statement projections.

* See lender presentation for monthly projections.

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Financial Analysis – ValuationEV Waterfall (Based on historical EBITDA Range)

Multiple $50 $100 $150 $200 $250 $3004.0x 200 400 600 800 1,000 1,2004.5x 225 450 675 900 1,125 1,3505.0x 250 500 750 1,000 1,250 1,5005.5x 275 550 825 1,100 1,375 1,6506.0x 300 600 900 1,200 1,500 1,8006.5x 325 650 975 1,300 1,625 1,950

Admin Claims $1004.0x 100 300 500 700 900 1,1004.5x 125 350 575 800 1,025 1,2505.0x 150 400 650 900 1,150 1,4005.5x 175 450 725 1,000 1,275 1,5506.0x 200 500 800 1,100 1,400 1,7006.5x 225 550 875 1,200 1,525 1,850

$2,035USD 76.9m First Lien Revolver (73m LC) 1 73 4.0x 5% 15% 25% 34% 44% 54%

First Lien Term Loan B 1 978 4.5x 6% 17% 28% 39% 50% 61%First Lien Notes 1 970 5.0x 7% 20% 32% 44% 56% 69%

Capital Lease & Equip. Financing 14 5.5x 9% 22% 36% 49% 63% 76%2,035 6.0x 10% 25% 39% 54% 69% 84%

6.5x 11% 27% 43% 59% 75% 91%

EBITDAX (USD m)

Senior Secured Obligations

Residual Value for Senior Secured Obligations

% Coverage for Senior Secured Obligations

Waterfall Assumptions:(1) Bankruptcy administrative fees of USD 100m.(2) Existing cash excluded from recovery.(3) Outstanding LC's included in Sr. Sec. Obligations.

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Financial Analysis – DCF Valuation

Walter Gas 2015 2016 2017

EBITDA (USDm) (3) 3 6

Mine #4 2014 2015 2016 2017Tonnes Produced (000's) 2,468 2,945 2,671 2,720 Price ($/Ton) $112 $98 $102 $105 Revenue (USDm) 276 289 272 286

Cash Cost of Sales ($/Ton) $105 $95 $101 $102 Cost (USDm) (281) (280) (270) (277)

EBITDA ($/Ton) 7 3 1 3 EBITDA (4) 9 3 8

Capex (29) (21) (33) (61)

Mine #7 2014 2015 2016 2017Tonnes Produced (000's) 4,741 3,998 3,811 4,506 Price ($/Ton) $118 $99 $104 $107 Revenue (USDm) 559 396 396 482


EBITDA ($/Ton) 26 1 13 3 EBITDA 117 4 50 14

Capex (44) (49) (39) (41)

West Virginia 2014 2015 2016 2017Maple SurfaceTonnes Produced (000's) 454 280 442 424 Price ($/Ton) $74 $66 $72 $74 Revenue (USDm) 34 18 32 31


EBITDA ($/Ton) 11 (5) 9 11 EBITDA (USDm) 5 (1) 4 5

Maple UndergroundTonnes Produced (000's) 381 255 418 413 Price ($/Ton) $106 $98 $85 $82 Revenue (USDm) 40 25 36 34


EBITDA ($/Ton) 1 (6) (11) (15)EBITDA 0 (2) (5) (6)

Total Capex (USDm) (20) (6) (9) (8)

Walter Gas 2015 2016 2017EBITDA (USDm) (3) 3 6

US Coal DCF AnalysisAnnual Production (Mill ion Tons) 8.0

Low Price ($/Ton) $80.00Mid Price ($/Ton) $100.00High Price ($/Ton) $120.00

Cash Cost of Sales ($/Ton) $95.00Capex (USDm) 90SG&A (USDm) 60

Low Case Margin (USDm) -270Mid Case Margin (USDm) -110High Case Margin (USDm) 50

Assigned Reserve Life 15Discount Rate 10%

Est. High DCF Value 380(+) Est. Value of Gas Ops 25Est. Total Value 405Est. Recovery for First Liens 20%

Source: Lender presentation, Pg. 33-36

Source: Debtwire Analytics

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Financial Analysis

Source: Lender presentation, Pg. 22


Appendix

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Appendix: Debtwire Proprietary News

Article Link Date Published

Walter Energy taps local Alabama counsel for restructuring 21-May-15

Walter Energy unsecureds enlist Davis Polk, Houlihan; management mulls venue options 04-May-15

Walter Energy first lien bonds tap FA ahead of unsecured coupon payments 08-Apr-15

Walter Energy first lien recoveries could diverge on Canadian collateral 26-Mar-15

Walter Energy adds to restructuring advisory roster 20-Mar-15

Walter Energy selects advisor as first liens tap legal 11-Mar-15

http://us.debtwire.com/intelligence/intelligenceDetail.asp?zone=110&verb=202&contextid=630751132&mode=4&style=20&page=1










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Appendix: Legal Analysis

Analysis Link Date Published

ANALYSIS: Debtwire reviews common coal company restructuring issues to guide stakeholder strategy 20-May-15

ANALYSIS: Walter Energy venue choice will determine leverage with unions 08-May-15









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Appendix: Financial Research

Analysis Link Date Published

RESEARCH: Walter Energy first liens price in turnaround optionality 16-Jul-15

http://us.debtwire.com/intelligence/intelligenceDetail.asp?guid=C947B82C6BC0404EA04090EB1A3F09C3&contextid=631609169&contextiddeal=&typecode=target&verb=73&dealsysid=283071&companysysid=57685&subnavid=2&zone=830&currencycode=USD&pageiddeal=&mode=4&style=20&page=1


Biographies

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Biographies

Andrew RagslyManaging Editor, North America| [email protected]

The team of journalists Andrew manages in New York routinely breaks news in restructuring, distressed and primary market situations. Editorial content also delves into detailed analysis of recovery scenarios, relative value and buyside strategy.

Andrew joined Debtwire in 2007 as a reporter covering industrial sectors. He became deputy editor of Debtwire North America in 2011, and took over as managing editor in 2012.

Tim HynesHead of Distressed Research, North America | [email protected]

Prior to joining Debtwire he was Head of Debt Capital Markets at Gleacher and Company. Mr. Hynes has also held positions at Cerberus Capital, Bankers Trust and GE Capital.

Mr. Hynes received a BA in Finance from Michigan State University.

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Biographies

Madalina IacobSenior Reporter, North America | [email protected] Iacob is a senior distressed debt reporter for Debtwire, covering the energy sector and telecommunications. She writes breaking news stories and analytical articles on distressed borrowers and debtors including Energy Future Holdings, ATP Oil & Gas, Samson Resources, Patriot Coal and Nortel. She received a M.A. in Business and Economic Reporting from New York University and an M.A. in European Politics & Policy from Manchester University, UK, where she was an Open Society Foundation/George Soros scholarship recipient.

Jack M. Tracy IISenior Legal Analyst, North America | [email protected] is a former practicing restructuring attorney. Prior to joining Debtwire as Senior Legal Analyst, Jack practiced in the New York offices of Akin Gump Strauss Hauer & Feld LLP and Willkie Farr & Gallagher LLP. He has represented debtors, official committees and ad hoc groups in several high-profile restructurings, including James River Coal, Energy Future Holdings, Edison Mission Energy, Nortel Networks, Cengage Learning, Otelco and Broadview Networks.